Shareholders in International Biotechnology Trust (IBT) can look forward to a 50% rise in this year’s dividends after an outstanding 12 months of performance.
Including its semi-annual dividends, IBT delivered a total return to shareholders of 73.6% in the year to 31 August, smashing the 52.3% from the Nasdaq Biotechnology index, the fifth year in a row it has beaten the benchmark.
IBT’s annual results showed the total underlying return from investments in drug developers was 64.7%, driven by a surge in bids and takeovers that saw 27% of the portfolio acquired in 13 transactions. This was up from five in the previous year.
This means £3.25m has been set aside as a performance fee for Schroders. This is on top of Schroders annual management fee for the trust’s quoted portfolio which has been cut to 0.65% from 0.7%.
Big deals that benefited the trust included Vertex Pharmaceuticals’ $10bn acquisition of Crinetics Pharma, Biogen’s $5.6bn swoop on Apellis Pharma and Merck & Co’s $6.7bn purchase of Terns Pharma.
Although most of IBT’s investments are in the US, the biggest contributor to performance was Netherlands-based uniQure. Its shares, which are listed on the US tech Nasdaq exchange, soared 250% after positive phase 1/2 trials for its gene therapy for Huntington’s disease.
IBT’s Schroder fund managers Ailsa Craig and Marek Poszepczynski enhanced the return by selling the position before the share price fell after the Food and Drug Administration requested more data.
The total shareholder return was 5.9% higher than the underlying portfolio return because of increased investor demand which pushed the shares ahead of the underlying assets. As a result, the discount, or gap, between the share price and the net asset value (NAV) of investments narrowed from 8.9% to 4.1%.
Excluding dividends, the portfolio’s NAV jumped 50% from £249.4m to £274.6m. As the company pays 4% of NAV in dividends each year, the pay-out for the new 2027 financial year ending next August is also set to rise 50% from the 31.3p distributed in 2026.
That should mean a pay-out of around 46.95p per share which puts the shares on a forward yield of 4.5% at the current price of £10.26.
Unquoted investments do well
IBT holds 6.9% of its assets in unquoted, early-stage biotech companies through one venture capital partnership run by Schroders Capital and two by its former manager SV Health, where Craig and Poszepczynski used to work.
The Schroders SC IBT SLP partnership has so far drawn down £5.5m of investment from IBT, generating a 37.1% annual return from three externally managed venture capital funds. It accounted for 1.6% of assets at 30 June though this looks set to rise as after the encouraging start IBT has committed a further £25m.
The SV funds are SV Fund VI and SV Biotech Crossover Opportunities (SV BCOF). Fund VI, which is in run-down as its investments mature, generated a 13.1% return and made p 1.6% of assets. BCOF, in which IBT invested $30m in 2022, has delivered a very strong annual return of 74% and accounts for 3.1% of IBT. SV Health will be paid a £321,000 performance fee.
Optimism despite rising interest rates
Chair Kate Cornish-Bowden said IBT had outperformed the Nasdaq Biotechnology index over one, three, five and ten years up to 31 August. AIC data shows it currently leads the band of seven London-listed healthcare and biotechnology funds over five and 10 years with total shareholder returns of 79.25% and 192%.
After such a strong run Cornish-Bowden was cautious, saying recent interest rate rises in the US and European “may dampen investor enthusiasm for valuations in the biotechnology sector, which are sensitive to rising yields.”
She added: “Nevertheless, our portfolio managers remain optimistic that structural trends undermining the robust recovery which the sector has witnessed this year are set to continue.”
The managers agreed, saying the sector was “now better placed to absorb this risk [of higher interest rates] than it was during the depths of the bear market, given improved access to financing, strong balance sheets across many companies and the increasing focus of our portfolio on commercially ready businesses where value creation is driven less by discount rates and more by clinical execution, product launches and strategic demand from large pharmaceutical acquirers.”
Our view
Richard Williams, senior analyst at QuotedData, said: “An outstanding year for IBT and a fifth year of outperformance over the Nasdaq Biotechnology Index on the trot. The scale of takeover activity is particularly striking, with 13 portfolio companies, representing around 27% of NAV, acquired during the year. This provides compelling evidence of the managers’ ability to identify attractive acquisition targets, while reinforcing the investment case for biotechnology as large pharmaceutical companies seek to replenish their drug pipelines ahead of looming patent expiries. Successful stock selection extended beyond takeovers, notably the timely exit from uniQure following its sharp rally. After such exceptional gains, sustaining this level of performance will be challenging, but IBT’s record of identifying successful biotechnology investments remains impressive. Encouragingly, the managers have used the sector’s recovery to reduce portfolio risk, shifting towards commercially ready businesses where clinical uncertainty is lower and potential acquisition interest remains strong. The narrowing of the discount reflects growing investor confidence, although higher interest rates and continuing regulatory uncertainty remain potential headwinds.”
